Bank gives Australian insurance sector a tick

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7 January 2009

The Australian insurance sector is adequately capitalised to deal with current financial conditions, based on current bond and equity levels, according to analysts at the local arm of Deutsche Bank.

A new report from the bank says Australian equities finished the second half of 2008 more than 30% down on the year, contributing to generally negative investment income across the board.

It says some insurers fared better than others.

Suncorp quit equities before the falls of October and November, while Axa gained “some benefit from its downside protection initiated at the end of October”.

Axa Asia Pacific Group CEO Andy Penn told a London roadshow last month the insurer has used a series of financial instruments in the second half of last year to reduce equity exposure in Australia, NZ and Asia.

Deutsche Bank analysts have attached “buy” recommendations to AMP, Axa Asia Pacific, QBE and Suncorp. IAG shareholders have been advised to hold their stock.

They have reduced insurance trading ratio (ITR) margins on IAG and Suncorp due to widening credit spreads, but say an ITR of more than 10% for IAG and 10-12% for Suncorp is achievable.

IAG is forecast to withstand a 30% fall in net profit for the current financial year while Suncorp net profit is expected to fall 9%.

The report says key risks for local insurers include the ever-present threat of more expensive catastrophes and more commercial premium rate pressure, coupled with further equity market declines.